By Peter Valdes-Dapena, CNN Business
Average car prices are rising more and more thanks to the continued shortage of auto parts. Interest rates are skyrocketing thanks to the federal government’s efforts to control inflation. And automakers and dealers have less incentive to take action to cut costs, as demand still far outstrips supply.
The bottom line: don’t expect the auto market to return to normal anytime soon.
The average interest rate on new auto loans hit 5.7% in the third quarter of 2022, the highest since 2019, according to Edmunds.com. At the same time, the average amount financed for the purchase of a new car reached an all-time high of $41,347. The average monthly payment in the third quarter was over $700. It was $630 in the same quarter last year, and the average down payment was also nearly $1,000 less, according to Edmunds.com.
Americans are keeping their cars longer and longer. The average car on US roads today is over 12 years old, according to S&P Global Mobility. And he’ll probably just get older.
People typically go out and buy a car about every five years, so the last time many people with good credit were in the market, they could have gotten much lower interest rates from the financing arms of automakers. .
“I think anyone who bought a car back then and now comes back to the market and is like, ‘Five percent! It’s way more than I expected! said Jessica Caldwell, industry analyst at Edmunds.com.
In recent years, when the Fed raised interest rates, automakers offered auto loans at artificially low interest rates — sometimes even 0% — as a buying incentive. But with few cars for sale, there’s little incentive to do that sort of thing now, Caldwell said.
“What’s the point of creating a very low subsidized interest rate for inventory they don’t really have? she says.
Those high costs will be hard on consumers, but they still won’t reduce demand enough to ease pressure on car prices, at least in the short term, analysts told CNN Business. That’s because demand for new cars already outstrips supply so much – hence the high prices – that the reduction in demand caused by these even higher payments still won’t put things right. Car dealerships can still sell every new car that arrives on their lots, often even before the haul trucks deliver them. Customers will only have to pay more.
“I’ll wait for the time when we turn the corner,” buyers think, said S&P industry analyst Mike Wall. “Well, we turn the corner and it turns out there will be another corner.”
That means the average car in America will continue to age as owners hang on longer.
“It’s almost guaranteed that we’re going to be approaching an average age of 13 very soon,” said Jonathan Smoke, chief economist at Cox Automotive.
Car buyers without good credit are already being forced out of the new-car market, Smoke said. People with low credit ratings, known as subprime borrowers, typically account for 15% of new car purchases. They’re down to just 5% now, he said. And deep subprime borrowers, who typically make up about 8% of new car buyers, are now virtually absent from the market. Subprime and deep subprime borrowers generally have to pay much higher interest rates.
Once car production returns to something like normal – maybe in the second half of 2023 or maybe not even then – interest rates could start to become an issue. Automakers may finally have to do something to make buying a car at least a little more appealing to consumers, Wall said. But only a little.
The inventory shortage is starting to ease a bit, Smoke said. In recent months, there have been a few hundred thousand more vehicles on dealer lots, he said.
“It’s not generalized across all models, but it’s mostly North American domestic production,” he said.
One type of vehicle where things are improving faster are large trucks, he said, which, thanks to protective trade tariffs dating back to the 1960s, are virtually all built in North America.
“If I anticipate an area where there might be more discounts sooner or where there might be a return to more attractive rental deals, I would look for the full-size pickups,” he said.
smoke said there is one thing that could help normalize the new car market: a recession, which would really hurt demand.
So, yes, by then it might finally be easier to buy a car at a good price, but many people might end up paying another way.
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